GCC foreign assets set to scale new peak

A recovery in oil prices because of better global economic prospects will likely boost the foreign assets of Gulf nations to a new peak, and this will provide them with a strong cushion against any fresh fiscal crisis.

After the first decline in 2008 in nearly six years due to the global financial turbulence, the foreign assets of the six-nation Gulf Co-operation Council (GCC) could surge above their gross domestic product (GDP) at the end of next year. But according to a key Western financial organisation, the GCC countries need to push ahead with economic reforms to support their asset cushion and ensure sustainable growth away from unpredictable crude sales.

The Washington-based Institute of International Finance (IIF) and regional institutions believe the six GCC members, sitting atop nearly 45 per cent of the world's recoverable oil deposits and more than a quarter of the global gas wealth, currently have sufficient financial assets to deal with the fresh crisis.

It was the massive overseas wealth they had amassed during the latest oil boom of 2002-2008 that allowed them to partly mitigate the repercussions of the 2008 crisis and guard their economies against a painful depression.

Besides the expected surge in their foreign assets, the combined current account of the six members is also projected to sharply rebound in the next two years after plunging in 2009. The IIF's figures showed the balance would widen due to a projected rise in oil and gas export earnings from about $323 billion (Dh1.186 trillion) in 2009 to $419bn in 2010 and $457bn in 2011.

This will push the current account surplus from nearly $48bn in 2009 to $129bn in 2010 and $165bn (equivalent to 15 per cent of GDP) in 2011.

The fiscal surplus will also widen from three per cent in 2009 to 10 per cent of GDP in 2010-2011 despite a continued rise in government spending, the IIF said.

Its estimates showed the gross foreign assets of the six members have more than tripled since 2002 to about $1.47trn at the end of 2009. Net foreign assets, the difference between total assets and liabilities, stood at about $1.049trn at the end of 2009. They are projected to soar to nearly $1.34trn at the end of 2011, nearly 122 per cent of the GCC's GDP.

Support for spending

"The large net foreign assets of the region will continue to provide substantial funds to sustain robust government spending levels in the next few years. Benefitting from large current account and fiscal surpluses during the period 2002-2008, gross foreign assets more than tripled to $1.47trn at end-2009, with relatively little external debt," the IIF said.

"The current crisis has reduced medium-term growth prospects in the GCC region as well as in other regions. Typically, recessions associated with a financial crisis require time to recover, and globally synchronised recessions are deeper than others. Potential growth in the GCC may also be adversely affected, given the lasting damage to labour markets. This underscores the importance of advancing the structural reform agenda in the region."

The IIF said it believed there are some downside risks to the outlook in the GCC region despite the group's massive overseas assets. "First, a slower-than-expected recovery in the global economy could dampen oil prices. This would adversely affect the region's export earnings, fiscal and external balances and hydrocarbon growth. Second, market concerns about sovereign liquidity and solvency in the euro periphery may turn into a full-blown, contagious sovereign debt crisis," the report said.

"Third, continued weak private sector demand and tighter financial conditions could lead to an increase in corporate distress that could feed back into banks in the region. The sharp slowdown in credit growth, if it persists, may expose problematic loans that have been masked by the generally favourable banking profitability conditions in the region."

Sovereign wealth funds

Independent estimates showed more than half the GCC's foreign assets are controlled by their sovereign wealth funds (SWFs), including the Abu Dhabi Investment Authority (Adia), and the Kuwaiti and Qatari Investment Authorities. The Saudi Arabian Monetary Agency (Sama), the kingdom's Central Bank, is also believed to be one of the world's largest foreign asset holders.

Estimates by the US SWF Institute showed Adia controlled about $627bn at the end of 2009 while funds held by KIA and QIA were put at nearly $202.8bn and $65bn respectively. Sama's assets stood at $431bn.

But IIF and another US organisation – the Council on Foreign Relations (CFR) – estimate Adia's wealth at much below that level. The IIF put it at about $390bn at the end of 2009 while CFR estimated it at $328bn at the end of 2008.

The surge in oil prices to a record high average of more than $95 a barrel during 2008 partly offset the crisis-related losses of regional SWFs, according to CFR.

It estimated their total loss from the market upheaval at about $350bn but there was a net inflow of nearly $273bn because of the surge in oil prices.

Saudi Arabian assets

In Saudi Arabia, Sama's foreign assets shot up by nearly 43 per cent to SR1.709trn (Dh1.673trn) at the end of 2008 from nearly SR1.196trn at the end of 2007 after the kingdom recorded its highest ever fiscal surplus of SR590bn.

The assets dipped to nearly SR1.57trn at the end of 2009 but remained far higher than their level in 2007 and the previous years. The decline was mainly a result of a sharp increase in state spending as part of the country's counter-crisis fiscal expansion measures. At the end of April, they rebounded to nearly SR1.605trn and analysts attributed this to a sharp recovery in oil prices.

"Saudi Arabia is on [a] strong footing to weather any turbulence that emerges in the second half of this year, having replenished foreign assets almost to 2008 levels and created an atmosphere, through state spending, that strives to encourage the private sector to engage in the economy," said John Sfakianakis, Chief Economist at Banque Saudi Fransi, one of the largest Saudi banks.

Fiscal measures in Saudi Arabia and other GCC members, aided by their strong overseas financial muscle, provided a good cushion to their economies in late 2008 and through 2009 despite sluggish bank credit and private sector investment. Most of them recorded a positive growth albeit slower than in 2008, except Qatar, whose economies kept roaring ahead due to surging gas exports.

Although growth in Saudi Arabia plunged to just 0.6 per cent in 2009 from more than four per cent in 2008 and the UAE's GDP edged down slightly, it was because of steep cuts in their crude output as non-oil sectors maintained their upward trend. Official data showed the oil sector in Saudi Arabia and the UAE contracted by at least 10 per cent in 2009.

"The non-oil sector in most GCC countries has performed well over the past few years, but I think they need to pursue reforms. This should be an ongoing process and should not be linked to the movement of oil prices," said Ihsan Bu Hlaiga, a well-known Saudi economist.

The GCC's fiscal measures, including record high spending and liquidity injections, appear to be paying off in terms of economic recovery.

Sharp recovery

According to the World Bank, the GCC economies are projected to sharply rebound in 2010 to spearhead growth in the Middle East and North Africa (Mena).

In a study last month, it estimated Mena's real GDP growth at about 4.4 per cent in 2010 while growth in all oil exporters in the region was put at 4.3 per cent.

The projected growth for the GCC this year is far higher than the 0.8 per cent rate recorded in 2009 while that of Mena is also nearly double the 2009 growth of about 2.2 per cent, the World Bank said.

"Mena is recovering from the financial crisis along with the global economy. Growth in 2010 is expected to be 4.4 per cent region-wide, driven by domestic absorption as well as a positive contribution from external demand," it said.

Although oil prices are far below the levels reached during the oil boom years, they have moved to levels in the range between $75 and $85 a barrel – a level that is comfortable for many hydrocarbon exporters, the World Bank said.

"As a result of these positive developments, GCC oil exporters are expected to lead the regional recovery. In 2010, growth of GCC economies is projected to rise by 3.6 percentage points compared to a year earlier," it said. "GCC countries were hit hard by the global crisis so a return to growth of 4.4 per cent in 2010 and 4.9 per cent in 2011 represents a remarkable comeback."

Giant economy

In a recent study, Saudi Arabia's largest bank said the GCC's combined GDP is projected to nearly double to about $2trn in 2020.

National Commercial Bank (NCB) projected the GDP to reach about $1trn in nominal terms in 2010 before continuing its upward trend in the following years due to an expected surge in oil output.

Its figures showed the GCC's share of the global economy stood at only about 0.85 per cent in 1990 but swelled above one per cent in 2000 and peaked at nearly 1.54 per cent in 2008. The report expected that share to rise to 1.8 per cent in 2020 on the back of growth in the oil and non-oil sectors.

"The GCC countries are well positioned to assume a critically important position in the emerging new global order. The region's global weight extends far beyond the absolute numbers, given its strategic importance as a hydrocarbons supplier and one of the leading global repositories of government assets," it said.

The IIF figures showed growth in the GCC's foreign assets would be a result of a surge in their oil export earnings, and consequently current account surpluses. It said the increase in oil revenues would be triggered by a rise in the members' crude output and higher prices, which could average nearly $80 in 2011. As a result, their combined current account surplus will sharply rebound from about $47.4bn in 2009 to about $124.2bn in 2010 and nearly $157.2bn in 2011, according to the IIF. But it will remain way below the record high surplus of about $258bn registered in 2008.

High oil prices fetched the GCC nearly $1.84trn during 2004-2009, more than triple the income they netted during the previous six years. Nearly a quarter of the 2004-2009 revenues were earned in 2008 alone.

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